If you’re suffering under the weight of unmanageable debt, chances are you’ve looked into getting help from debt consolidation companies before.
However, it can be hard to evaluate which of these companies are helpful – and which ones might sink you further into a hole.
But when you understand what you need the most, what types of companies offer it, and the costs involved, it gets a lot easier. Here’s how to evaluate debt consolidation loan companies and figure out which one’s right for you.
What is debt consolidation?
It’s important to understand what debt consolidation is because this is a term that often gets misused.
At its core debt consolidation is the act of combining multiple debts into one. This can be done to help you manage payments, achieve more favorable terms, or both.
Technically, you don’t need to consider any debt consolidation companies. You just need a balance transfer credit card or a debt consolidation loan. And you can get both of these without the help of debt consolidation companies.
In a do it yourself situation like this (if you don’t opt for a balance transfer credit card), what you really need is a debt consolidation loan company. That’s a company that offers loans you can use to consolidate your debt.
The only reason someone might want to pay for a debt consolidation company rather than doing it on their own with a debt consolidation loan company is usually because they need help beyond consolidating debt.
Perhaps they can’t get approved for a debt consolidation loan or a balance transfer credit card. Or they can’t make payments at all and are hoping to get their debt settled. However, the companies that offer any of these services aren’t really doing debt consolidation, though.
5 ways to evaluate debt consolidation companies
No matter what kind of situation you’re in, there are a few things to think about before you move forward with any company advertising debt consolidation. Here are five things to consider before you get started.
1. Find out what you’re really getting
If you’re sure debt consolidation is what you need, beware of companies that claim to offer it. They may in fact only really offer credit counseling, debt settlement, or debt management.
Therefore, if you want to combine your debts into one loan to ease your payments and access more favorable terms, look into a balance transfer credit card. Or, a debt consolidation loan, which you can get through a debt consolidation loan company.
There are plenty of debt consolidation loan companies, such as Avant, Lending Club, Prosper, and Upstart. All you have to do is apply for a loan that’s large enough to cover the debt you want to consolidate.
Then, if you’re approved, the new loan will pay off the old debt, and you only have to pay on the new loan moving forward.
2. Consider the length of the new loan
If you go with a debt consolidation loan company, consider the length of the new loan.
For example, if it has a repayment time that’s longer than what you’re currently in for, then you could end up paying more on your debt. That said, if this helps make your payments more manageable, that might not be such a bad thing.
Remember, always consider why you want debt consolidation. If it’s to pay off debt faster, then you don’t want a longer repayment period. But if it’s to pay less per month, then a longer repayment period might be the only way to achieve that. Unless, of course, you can get a lower interest rate.
3. Pay special attention to the interest rate
Speaking of interest rates, make sure the interest rate on your debt consolidation loan is lower than what you’re currently paying. If you can only get a higher interest rate, then your consolidated debt will cost you more.
Again, this may be okay if the new monthly payment would be lower than what you’re currently paying on all of your debts and that’s what you really need. But does it really make sense to pay more for your debt?
At the end of the day, you want to try to get the lowest rate possible. Check out our personal loan calculator to see how low rates can factor into your repayment plan. Or use the calculator below to see how interest rates impact the cost of credit card consolidation.
Credit Card Consolidation Calculator
4. Calculate the fees
All new loans come with origination fees. Therefore, before signing on to a debt consolidation loan, calculate the cost of the fee to make sure it’s not unreasonably high.
And remember, this is the only fee you should ever pay on your loan (unless you make a late payment).
5. Read the reviews
This almost goes without saying, but before you sign on to any new credit, read reviews of the company.
The easiest way is to Google the company name with the word “reviews” behind it and see what shows up. If you see a lot of negative reviews, you should probably seek out a different company.
Some companies claim to offer consolidation but don’t
While there are many companies that call themselves debt consolidation companies, in reality, they often offer something else. Usually that something else is credit counseling, debt management, or debt settlement.
These offerings are ultimately geared towards people who aren’t qualified for debt consolidation loans due to poor credit. If that’s the position you’re in, here’s what you need to know about these three offerings.
1. Credit counseling
Credit counseling companies are typically non-profits that help you manage your money.
The Consumer Financial Protection Bureau (CFPB) describes credit counselors as, “certified and trained in areas of consumer credit, money and debt management, and budgeting.” These counselors will assess your financial situation and work with you to develop a plan geared toward getting your finances back on track.
Look out for fees attached to credit counseling, though, even from non-profits. Whether a credit counselor is for-profit or non-profit, they might try to charge you a fee upfront. And there might be other hidden fees as you use their service.
Don’t pay a fee upfront for a credit counselor. Additionally, don’t hesitate to ask them right away about any fees you might need to be aware of. Get it all in writing, so you’ll know exactly what you’re getting into.
Finally, understand that a credit counselor might refer you to a debt management plan. Remember, a debt management plan is not the same thing as debt consolidation.
If debt consolidation is what you want and you have a high enough credit score to be approved for a debt consolidation loan, then you don’t want or need a debt management plan.
2. Debt management
The CFPB describes a debt management plan as making “a single payment to the credit counselor each month or pay period and the credit counselor makes monthly payments to each of your creditors.”
Furthermore, a debt management plan can’t lower your overall debt:
Under debt management plans credit counselors do not negotiate any reduction in the amounts you owe – instead, they can lower your overall monthly payment […] by negotiating extensions of the periods over which you can repay a loan […] and by getting creditors to lower the interest rates.
If this is an option you’re considering, read these guidelines from the Federal Trade Commission to make sure it’s right for you.
3. Debt settlement
Debt settlement is a last resort and shouldn’t be considered unless you’re in default or on the verge of default.
A debt settlement company tries to negotiate with your lenders by withholding your payments. You pay them, they put the money in escrow, and they let your loans go into default. The idea is that your creditors might be more willing to negotiate when they realize any money at all is better than none.
However, this idea is also terrible for your credit score. The fact that the debt settlement company is withholding payments to negotiate with your lenders means that you’re going into default on your accounts. Since payment history makes up 35 percent of your credit score, going into default can very seriously hurt your score. If you’re considering this option, you might be safer declaring bankruptcy.
What’s more, if the settlement goes through, you might end up owing taxes on the settled amount. And, since settlement doesn’t always cover all types of debt, you could still find yourself in eventual bankruptcy.
If debt settlement is something you want to consider, read what the CFPB says to watch out for when evaluating debt settlement companies. And what they say about this option compared to credit counseling.
Using debt consolidation to your advantage
As frustrating as misleading advertisements from debt consolidation companies can be, this is still a great tool for improving your financial outlook. Being able to turn your debt payments into one, easy-to-remember payment and possibly even lowering your interest means you get peace of mind and possibly faster debt payoff.
And if you find that your finances are in need of more drastic help, don’t lose hope. Review your options and avoid any debt consolidation companies that want to charge large upfront fees or promise you quick and easy solutions.
Remember, it takes time to get your finances where you want them to be. It’s not always easy, but you can do it if you’re diligent. Also, be very careful who you work with.
And if you’re looking for information on handling your student loan debt, check out this article and consolidation and refinancing specifically for student loans.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|